Infosys Report

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INTRODUCTION
Company Profile
Infosys Limited is a leading global Consulting and IT services firm. The company provides solutions that span consulting, design, development, software re-engineering, maintenance and systems integration. The company also caters the banking industry and business process management services. Infosys was incorporated in 1981 as a private limited company. It became public limited in June 1992. Infosys started offering shares on stock exchanges in India (BSE and NSE) in 1993. (See Annexure 1 - COMPANY PROFILE) Industry Overview

In FY2012, the Indian IT industry weathered uncertainties in the business environment. Aggregate revenue for FY2012 crossed USD 100 billion. Aggregate IT software and services revenue is USD 88 billion. Embracing emerging technologies, increased customer-centricity, deepening focus on new markets, adopting new business models are some successful growth strategies followed by the industry. The country's IT industry grew by 16-17 per cent despite global IT industry went up by 5.4 per cent. (See Annexure 2 – INDUSTRY OVERVIEW) Credit Rating

The credit rating of Infosys is BBB+ (Standard & Poor's rating). According to S&P, “a rating of BBB (long-term credit rating) exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.” The “+” in the BBB+ indicates that the long-term credit rating (6 months to 24 months) may be raised.1 Stock Price Movement

The graph shows the stock price movement of Infosys over the past one year.2
STOCK PRICE VALUATION
Discounted Cash Flow Method (DCF) Method
WACC Calculation
WACC = (Cost of Equity) (E / E+D) + (Cost of Debt) (1 - Tax Rate) (D / E+D)

Risk-free Rate (India)
3 month Treasury Bill Rate3
8.18%NOT USED for WACC
10 year Long Term Treasury Bond Rate4
8.23%USED for WACC

The investor is expected to invest for the long term. Therefore, the risk free rate used for WACC calculation is the 10 Year Long Term Treasury Bond Rate of 8.23%. Beta
The Beta for Infosys Limited has been reported as 0.63. This means that the returns and the risk of investing in the company are much lesser than the industry average returns and risk.5

Market Risk Premium
The market risk premium typically ranges from 6 % to 7%. For the purposes of evaluation of this Company, I will stick to the value of risk premium (7%) so that the investor can feel safer with the stock price target evaluation.

Therefore,

Cost of Equity = Risk-free Rate + Beta * Market Risk Premium = 8.23% + 0.63 * 7% = 12.6%

Target Capital Structure
Infosys doesn’t have any outstanding debt or fixed deposits in its Capital Structure and is completely financed by Equity. The company presently generates sufficient cash internally to finance all its operational, financing and investment requirements. I suggest Infosys should continue working with the same capital structure of no debt to have no leverage. Since the company has a BBB+ credit rating, it will have no problems in borrowing from the market in case it needs to do so, but still it is recommended that it doesn’t.

Therefore,
Capital StructureEquityDebt
Existing100%0%
Target (proposed)100%0%

Now,
WACC = (Cost of Equity) (E / E+D) + (Cost of Debt) (1 - Tax Rate) ( D / E+D) = 12.6% * 1 + 0 = 12.6%

Forecasted Cash flows
The forecasted cash flows have been divided in to 4 distinct periods of growth. The growth rates and all the free cash flows are nominal. Phases of growthYearsNumber of yearsAssumption
Period 120131Growth rate in top line of 4% per annum
Period 22014 - 20174Growth rate in top line of 7% per annum Period 32018 – 20225Growth rate in top line of 11% per annum Period 42023PerpetuityGrowth rate in top line of 5% per annum

Each of the four periods of growth include assumptions regarding growth in revenue, operating...
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